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MEMBER NEWSLETTER MARCH 2017

Welcome to the March edition of the Generate KiwiSaver Scheme Newsletter.

Performance of Our Funds

Returns to 28 February 2017 (after fees* and before tax).

	One Month	One Year	Two Year (p.a.)	Three Year (p.a.)
Conservative	0.80%	5.01%	5.64%	7.39%
Growth	2.67%	9.34%	6.29%	10.02%
Focused Growth	3.55%	10.22%	5.57%	10.00%

*except the $3 per member per month fee.
Note: Past performance is not necessarily an indicator of future performance.

Strong global markets were a positive catalyst for our growth funds given their exposure to international equities. For the month of February the Conservative, Growth and Focused Growth Funds gained 0.80%, 2.67% and 3.55% respectively (after fees and before tax). Our U.S. exposure continued to benefit from the rally in U.S. stock markets as expectations continued to mount over President Trump's reflationary ambitions and corporate tax reforms.

The February reporting season saw some of our key holdings report their financial results. Metlifecare (MET) rose 8.2% on the month after posting a sizeable uplift (+14%) in its net tangible asset value as improved portfolio revaluations continue to come through. Aged care, gentailers and infrastructure were noteworthy contributors on the month.

In the fixed income portion of the Conservative and Growth Funds yields continued to stabilise in February and a number of fixed interest investments delivered sound returns.

The Sydney headquartered Stockland recovered January’s losses and was the best performer across our Australian equity exposure. The stock rallied 9.3% after reporting solid results for 1H 2017 highlighting encouraging growth across its property portfolio. The company tightened guidance to the top end of their previous range which boosted sentiment towards the stock. We used this strength to lighten up our holding and lock in profits. The NZD weakening on the month against the AUD also helped returns.

Positive global equity markets were a tailwind for our International Equities Managers (IEMs) with all of them recording positive gains on the month. The top performing IEM was Worldwide Healthcare Trust Plc (WWH) with an 11.3% return in February (in GBP). Healthcare was driven higher by gains in biotech and increased speculation of M&A activity. Polar Capital Technology Trust Plc (PCT) continued its run, up 7.0% on the month as fourth-quarter earnings season delivered mostly positive results that were rewarded by investors.

Stronger U.S. markets helped lift investor sentiment across the globe and world markets ended up in the month of February. Global stocks climbed to peak levels mid-month, setting a new record for the first time since 2015, as hopes for faster economic growth buoyed markets. Encouraging economic data, stronger consumer demand and continued strengthening of manufacturing conditions helped the MSCI AC World Index advance 2.8% (in local currency) and build on January’s gains.

New Zealand equities were stronger with the S&P/NZX50G returning 1.7%. The Reserve Bank left the OCR unchanged and said it would not be going up for “a considerable period”. Comforted by headline inflation returning to its target band and a moderation in house prices the RBNZ sees longer-term inflation expectations “well-anchored at around 2%”. The release of its Monetary Policy Statement saw the New Zealand dollar sell off and interest rates fall.

Mixed economic data released through February did little to halt the continued rise of US equities and the S&P 500 Index returned 3.7% (in USD), extending its run of positive monthly gains. At the sector level, healthcare, financials and consumer staples led the market higher, while telecommunications and energy were the noteworthy underperformers.

European equity markets also advanced in February as data continued to show a resilient and strengthening macroeconomic backdrop. Accommodative monetary policy, less austerity and a weaker Euro were further tailwinds that supported markets.

Australian economic data showed continued signs of improvement and the country’s residential property market remains upbeat. The S&P/ASX 200 (in AUD) was up 1.6% over the course of the month.

What's New in KiwiSaver

The Government announced plans this month to lift the pension age to 67 by 2040 but has so far said that they will leave the access age for KiwiSaver at 65. Some commentators have said this will result in people using up more of their KiwiSaver at the beginning of their retirement. News-flow will continue to emerge on this topic and we will continue to keep you informed of developments. Click here for more.

Warren Buffett wisdoms

After 50 years at the helm of Berkshire Hathaway (which is typically one of our largest investments for both of our growth funds) Warren Buffett has become widely regarded as the world’s greatest investor. In his annual letters to shareholders, and in various interviews he has given, he has shared many of the lessons he has learned during his career. This month:

“Risk comes from not knowing what you’re doing”

Many people make investments without appreciating the level of risk they are taking. In the past, some New Zealanders lost money in finance companies where the level of risk they were taking was mispriced relative to the reward. Understanding the nature and objective of various financial instruments and asset classes better protects investors from taking risks they do not know they are taking. At Generate we always advocate people seek advice to understand their investment options, to develop an investment strategy and make sure they review it regularly.

Investing 101

Discounts and premiums

In some instances Generate accesses International Equity Managers via listed investment trusts. Investment trusts offer a cost-effective and liquid way of accessing a desirable investment strategy and/or manager. Investment trusts invest in the shares of companies that have a readily available value – the published net asset value (NAV) – which is the value of these underlying assets. However, because the shares of the trust itself are also traded on the stock market, they may also vary according to sentiment, demand and how investors value the underlying businesses.

Often investment trusts trade at a slight discount to NAV which means investors are buying the shares ‘on sale’ relative to the fund’s intrinsic value. The discount can enhance the yield on the trust and at times these discounts can widen out presenting opportunities for us to get a better entry price. They might also go to a premium to the NAV reflecting significant demand for that trust. Premiums to NAV occur when more investors want to buy the shares than sell them. Investors need to be mindful here because in essence they are paying a higher price than the sum total of the trusts underlying investments.

At Generate we monitor the discount/premium levels and at times look to take advantage of any discrepancy between an investment trust and its NAV.

Top Holdings as of 28 February 2017

Please log in to your account to see your full portfolio breakdown.

Conservative Fund	Growth Fund	Focused Growth Fund
International Equities Managers
N/A	Berkshire Hathaway	Berkshire Hathaway
N/A	Magellan Global Fund	T Rowe Price Global Equity Fund
N/A	T Rowe Price Global Equity Fund	Magellan Global Fund
N/A	Platinum International Fund	Platinum International Fund
N/A	Worldwide Healthcare Trust	Polar Capital Technology Trust
Property and Infrastructure
Infratil	Infratil	Infratil
Arvida Group	Ryman Healthcare	Arvida Group
Ryman Healthcare	Arvida Group	Contact Energy
Contact Energy	Z Energy	Ryman Healthcare
Z Energy	Contact Energy	Z Energy
Fixed Income and Cash
Term Deposits	Cash & Cash Equivalents	Cash & Cash Equivalents
Cash & Cash Equivalents	Term Deposits	N/A
Kiwi Income Property Aug 2021 Bonds	Rabobank Nederland Perpetual Securities	N/A
ANZ Perpetuals	Kiwi Income Property Aug 2021 Bonds	N/A
Chorus May 2021 Bonds	Fonterra Oct 2021 Bonds	N/A

International Equities Manager Spotlight

Berkshire Hathaway Inc.

Led by famed value investor Warren Buffet, Berkshire Hathaway's success has been built on the firm's record of acquiring and managing a portfolio of businesses with enduring competitive advantages.

Whether through direct ownership of individual companies or via significant shareholdings, Buffett has typically looked to acquire firms that have consistent earnings power, generate above average returns on capital, have little to no debt, and have solid management teams. Once purchased, these businesses tend to remain in Berkshire's portfolio, with sales seldom occurring.

In the early part of his career at Berkshire, Buffett focused on long-term investments in publicly quoted stocks, but more recently he has turned to buying whole companies. Berkshire now owns a diverse range of businesses including confectionery, retail, railroad, home furnishings, jewellery sales, newspaper publishing, and several regional electric and gas utilities. Some of the brands that Berkshire has investments in include: IBM, Kraft Heinz, Coco-Cola, American Express, and Wells Fargo.

Berkshire Hathaway averaged annual growth in market value of 20.8% for its shareholders from 1965 to 2016 (compared to 9.7% for the S&P 500 with dividends included for the same period). According to the 2016 Forbes Global List, Berkshire Hathaway is the fourth largest public company in the world (by market value).

Next month: Magellan Global Fund

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Generate Newsletters

Welcome to the March edition of the Generate KiwiSaver Scheme Newsletter.

Unit Prices as at 28 February 2017 ($)

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